5 Questions to Keep Your ETF Investing on Track

By Gary Gordon | August 12, 2008 | 9:24 PM | 1 Comment

Every now and again, I enjoy shaking things up. For instance, there's a downloadable application for the iPhone called "Urban Spoon." You shake the iPhone and... using GPS navigation... Urban Spoon suggests a restaurant nearby.

In the spirit of shaking up the blog format, then, I thought I'd do a bit of Q &A for exchange traded fund investing. For readers, e-mailers, radio show listeners, I've put together the following:

Question #1: Since the economy is really bad, doesn't that mean that stock ETFs will be really bad?

Answer: No... it doesn't work that way. Historically speaking, stocks do about as well during recessions as they do during expansions. In fact, stocks may do well from a recession's lowest ebb to the mid-point of economic expansion. Similarly, stock markets tend to struggle in the 2nd half of a strong economy on through the 1st half of a troubled one.

Question #2: If the economy needs to hit rock bottom before ETF investing can improve significantly, when will we see the lowest point of the valley?

Answer: Nobody knows for sure. There are clues, however. For instance, the first sign that the U.S. began losing jobs occurred this year. Each month since January of 08, more jobs have been lost than have been gained. When job losses and job gains are roughly equal, or when unemployment stabilizes, one might surmise that the economy is close to having bottomed out.

Of course, jobs are not the only area that is begging for stabilization. Mark Hines correctly points out that the real estate market will need to find solid ground as well.

Question #3: Couldn't we just wait for economic signs to improve rather than invest?

Answer: One of the biggest mistakes investors make is assuming that one single factor... like job numbers or oil prices or the party of the next president... can tell you the perfect time to invest. In truth, there's no way to decipher or crack the stock market code.

Perhaps the best example is the assumption that small company stocks would be struggling more than large company stocks in this ongoing economic turbulence. That's not the case. Here in 2008, the iShares Russell 2000 Index Fund (NYSE: IWM) has handily outperformed large companies in the S&P 500 SPDR Trust (NYSE: SPY).

However, you can stay focused on the things that remain in your control. You can't control oil prices, politics, interest rates, real estate, war between Russia and Georgia, corporate scandals, or the price movement of a company's shares.

Question #4: What's in our control?

Answer: We can control the outcome of the investments that we make; more specifically, you must make sure that you have a big gain, small gain, or small loss... no big losses. Even if you experience dozens of small losses, this is preferable to a single bad egg spoiling a buy-n-hold basket. (Think Enron or Bear Stearns!)

Question #5: Truthfully... will things ever get better?

Answer: You do not have to be an optimist, pessimist or any "ist" to see the light beyond the tunnel. Things most definitely will get better! Keep in mind that we live, work and invest in a global community -- one where the choices for creating wealth are well-defined. Company ownership (stock), company debt (bond), world currencies (dollars), coveted commodities (stuff), real estate (property), and savings (cash)... these are the tools in the shed.

Owning stock in companies is as old as business itself, and it will always be sought out. For those who need to maintain a standard of living for financial freedom, for those who intend to be "here" for more than 10 years, stock ETFs must be a part of your long-term planning.

You can ride out the turbulence with a higher cash position than you would otheriwse have. You can also diversify with a mix of foreign bonds (e.g., Lehman International Treasury (NYSE: BWX)), defensive sectors with momentum such as health care (e.g., the iShares Medical Devices Fund (NYSE: IHI)) and less volatile emerging market stocks (e.g., WisdomTree Emerging Market High Yield (NYSE: DEM)).

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Nice Piece Welcome aboard Gary! We appreciate your contribution. Jim Submitted by Jim Slagle on Tue, 2008/08/12 - 9:31pm » reply |